Tue, 05/04/2016 - 12:01
Hendrik Klein and his team at Zurich-based Da Vinci Invest AG have been trading futures on Eurex since 1995, using a sophisticated algorithm to track economic indicators. In 2009, when Need to Know News brought out a computer-readable news feed, Klein immediately implemented it into the Da Vinci algorithm.
The proprietary strategy that resulted was highly successful, generating nearly 14 per cent between August and December of 2009. On 1st June 2011, the strategy, which scans newsfeeds for econometric indicators such as non-farm payroll data, US unemployment figures to trade as soon as there are discrepancies between the consensus view and the actual news data, was formally launched as the K2 Tachyon Fund.
As its name suggests, speed lies at the heart of this ultra low latency trading strategy. Tachyons are sub-atomic particles that are thought to move faster than the speed of light.
"CERN in Geneva has been trying to discover these tachyons for many years, without success. We implemented our ultra low latency strategy with common fiber optic cables, but our dream is to gain an edge with sophisticated technology to transmit information from a source to a co-location," explains Da Vinci Invest CEO, Hendrik Klein (pictured).
The model developed by Da Vinci Invest uses news feeds that seek to optimise their way from the source to the co-location to minimise latency. The fastest order executed to date was 0.6 milliseconds, says Klein. Currently, the K2 Tachyon Fund uses co-locations in Frankfurt, Chicago and New Jersey.
"Using co-locations, our algorithm systems analyse news and take long or short positions in equities, fixed income, FX and commodities," says Klein.
What the algorithm is essentially doing is predicting how specific instruments will behave when a piece of news comes out. Although not definitive, there's a high probability the markets will move the way the algorithm predicts, according to Klein. All trades placed by the system are short-term – just a couple of minutes at the start and end of each day – after which the portfolio reverts back to cash.
Last year, the strategy added equities (including small cap stocks) and FOREX alongside fixed income and commodities and the fund was able to generate excellent returns for its investors.
"2015 was a record year, we were really pleased," confirms Klein. "Since inception we have never had a down year although investors need to be aware that this is a volatile strategy that does, on occasion, incur heavy drawdowns."
To further enhance the capabilities of the trading strategy, Da Vinci Invest added corporate news into the universe of newsfeeds, and plans to add natural disaster news into the model in 2016.
The K2 Tachyon Fund trades 16 futures markets: three index futures – the Dax, EURO STOXX 50, and SMI (Swiss Market Index), three interest rate futures – the Bund, Bobl (5-year German bond) and Schatz (2-year German bond), seven FX futures and three commodity futures.
The strategy thrives on market surprises such as Mario Draghi's announcement last week that the ECB would be increasing its bond buyback programme to EUR80bn per month.
Asked how such events have helped to generate alpha opportunities in the fund year-to-date, Klein says: "The perception of the markets versus the released news generates alpha including discrepancies between expert opinions and facts. There will be always opportunities every day i.e. on corporate news."
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